Early Life
When I was growing up I got an allowance if I did my chores throughout the week. I started saving pretty early. In junior high I would ride my bike downtown every Saturday morning. My mom got a part-time job downtown, and I had to get my allowance from her. I had to meet up with her before noon so I could get to the bank to deposit it in my savings account. I do not remember what I would do if I was not able to get to the bank before it closed on Saturday. I do not remember if I would spend it, or make a bigger deposit the next time.
The bank closed at noon on Saturdays. There was only one branch in town. I think back then banks in Illinois were limited to one branch. Banks still had savings accounts for kids where you could start with $10. I think my parents gave me the first $10. Do banks still have savings accounts for kids? I think not.
When I was in college, my parents paid for tuition, room and board. I worked over the summers and breaks for extra spending money. In addition to being Mr Physical Fitness, I was also Mr Fiscal Fitness.
So I went back to college a couple of times (it took me a while to figure out what to do with my life). I went into a LOT of debt, about $40K of loans. During my last semester I got a letter from the government telling me that I had maxed out.
I got a few jobs in software development. At one of the jobs (while I was still in school) I started putting money into a 401(k) plan. I made one contribution, and then there were layoffs. They lost one of their large customers because that customer was acquired. This was around the time of the dot com crash. So the money in that account really did go to zero.
I eventually got a job at one of the big banks. When they made the offer and told me the salary, I nearly fell out of my chair. About six months after I joined, the group that hired me left to start their own company. I decided to stay, since I lived in the city, and they were all out in the suburbs. I had no desire to go out there. I was put into a new group that did something totally different with technologies that I was not familiar with.
Then a few months later 9/11 happened. The economy was already slowing down. Now we were all worried there would be layoffs. All of my friends and family had left Chicago. I was living in a new neighborhood. I was in a new group in the bank. I had a lot of debt and not much savings. I realized I was in a very precarious position. So I stayed in a lot and started up a savings account.
I can remember sitting on the floor of my apartment looking at my savings account register when it only had about $2000 in it. I thought to myself that if I got laid off, that $2000 was all that was standing in between me and homelessness. It would not last very long.
My mom told me to start contributing to my 401(k) and to open an IRA. I put it off because I needed money now: I had been unemployed and still had debt. I did not see the point in putting away money that I would not be able to touch for decades when I had financial needs now.
Finally after four years I paid off all my loans and became completely debt-free. I made a LOT of extra payments.
Six months before I paid off my loans completely I did start contributing to a 401(k) and opened a Roth IRA. Before I did, I had done some reading about where to put my money. I did not want to put anything into the company stock since Enron was still fresh in people’s minds. A lot of people at Enron put everything into Enron stock and wound up with nothing.
When I started working at the bank, I would go to Yahoo Finance and go to the page about the company, and I would read articles about it. I would also look at CNN Money and other news sites. CNN Money and Motley Fool both had sections about getting your financial life in order. The steps were pretty much the same: pay off debt, build up some savings, and invest.
For investing, both advocated index funds.
Index Funds
So I started putting my money into index funds. I opened up a Roth IRA, a taxable account and I put money into my 401(k).
Detractors of index funds say that you can never do better than the market average if you index (sometimes “index” is used as a verb to mean “invest in index funds”). Proponents say that is kind of the point. While some actively managed funds beat the index in a given year, few do so consistently. If a fund has done better than the overall market for X years, it will probably do worse than the market in year (X + 1). This probability will increase as X increases. You won’t beat the market with an index fund, but you probably won’t beat it outside of one either. In general, the markets tend to go higher over time.
Index funds have less turnover than active funds, so they have lower costs as well. Plus an index fund does not have to spend money on research. Granted, a fund tracking the S&P 500 has to buy 500 stocks. But I would imagine that they get some sort of discount not only since they buy in bulk, but because the composition of the order is predetermined. But I don’t run a fund so I am just guessing.
An interesting fact about an actively managed fund is that other investors in a fund could raise your tax burden. Funds pass on capital gains taxes and other taxes on to their investors. So if you are buying while a lot of other people are selling, you could foot part of their tax bill. That sounds like a raw deal. It could be a really bad deal if you buy into a fund in December, and you help pay the taxes for people who sold earlier in the year.
As I stated, there are investors who beat the market, sometimes over decades. People who argue against index funds will bring up their names: Peter Lynch, Bill Miller, Warren Buffett, George Soros, Steve Cohen. But there are a few caveats. First, the active proponents keep bringing up the same handful of names over and over again. Also, a lot of funds that beat the market are hedge funds, which are inaccessible to most people. (Some people think that is a good thing.) Some, like Lynch and Soros, have retired from managing money. You also need to get in at the beginning of a winning streak. If someone beats the market for 10 years, and you hear about it in year 5, then the big money has already been made. So how to find those funds that are just starting their streak? Good luck with that.
So in the 401(k), I put the money into 3 US stock index funds (large-cap, mid-cap and small-cap), and a bond fund and an international fund. The bond and international funds were not index funds, but I wanted to be diversified and had to take what was offered. In my IRA. I went into a large-cap fund (the S&P 500 fund), an index for US stocks not in the S&P 500 (I think they called it the “Extended Equity Index”), a US bond index fund and an international index fund. In my taxable account I put my money into an S&P 500 fund.
I mentioned that I had done some research, both via books and the web. (Keep in mind I am not offering any services or advice; this site has a disclaimer.)
The Motley Fool and CNN Money sites have been changed in the intervening years. They both had sections that guided you through the whole personal finance continuum: They started with how to get out of debt, how to pay off your credit cards, how to set a budget, how to look for a good savings account, how to invest, etc, etc, all the steps on one page. Now they seem to have things scattered. CNN Money has a retirement guide.
The Motley Fool seems to have split things as well. They have pages on general personal finance and another on how to start investing, with a page that mentions index funds.
I read a few books by Jack Bogle, The Great Mutual Fund Trap, and A Random Walk Down Wall Street. A Random Walk Down Wall Street gets updated almost every year. He never uses the term “index fund”. Instead he uses a phrase like “a diversified basket of stocks”. I probably read a few others, but I cannot remember them right now.
You can also find a few good posts about index funds at Skeptic Money: What Is An Index Fund?, Investing – Where Do I Start?, Financial Flimflam and How Does Turnover Ratio Affect My Mutual Fund Return?
Obviously I did not stay an indexer.
Funemployment
So I was let go from the big bank in 2009. They had billions of dollars in losses, and they got some of it from me and a few thousand other employees.
I was making 401(k) contributions until the end. I also contributed to my IRA and my taxable account. I did not start dividend investing for another year. I wound up making back some of the money I lost when stocks hit their low in March 2009. More because I was lucky than because I was good. Mostly because I misunderstood the 60-day rule. (Reminder: This site has a disclaimer.)
I thought the 60-day rule meant that I only had 60 days after leaving my job to roll over my 401(k) to a traditional IRA. If I did not do it by then, I would have to wait until retirement age.
You can do a direct rollover or an indirect rollover. In a direct rollover, you open an IRA account, and then your 401(k) provider sends the funds to your IRA account. In an indirect rollover, your 401(k) provider writes a check to you. From that point, you have 60 days to put it in an IRA account. If you do not do it within 60 days, you have to pay taxes and penalties. So I put my 401(k) money into a traditional IRA.
During this time I was doing more reading as well. The indexes were not doing too well. I wondered if there was an alternative to indexes. But active investing was a bad idea. What to do?
So I was looking at articles around this time. As I said, I had been reading articles about the big bank I was working at. This led me to look at articles about other big companies as well.
A few years before this dividend taxes were cut. For a long time I could never understand what the big deal was. According to Yahoo Finance, a lot of stocks were yielding 2%. That was what bonds were yielding. What’s the big deal? Stock prices were going high back then. Not as high as during the 1990s, but still pretty high.
I have since come to know that dividends were a large part of the return of stocks, and there were periods in which not paying a dividend was not the norm. I think our perception was distorted by the capital gains/price model of stocks. Even when I was young, people would say the way to make money in the stock market was to buy low and sell high. Then the dot-com boom really changed people’s perceptions. Stocks were doubling in a year. Why bother with a 2-4% yield?
At some point I started reading about the Greater Fool Theory: You buy something with a sky-high value hoping to flip it to someone else. I think I first came across this term when the commodities, stock and real estate markets were doing well. Then in 2008 just about every market crashed at the same time.
So active investing was no good, and the indexes were tanking. Aside from hoping to live looooooooong enough to make it back, was there another way? Depends on how you actively invest.
As I said, I was reading articles about large companies. There was one on the Motley Fool called The Secrets of 9-Figure Fortunes. The article (and others that I read, some of them on The Motley Fool) talks about buying stocks that pay dividends and re-investing the dividends.
I knew about compound interest. I also knew about the Rule of 72. A stock paying 2-3% would take a long time to provide income from just the dividends without selling any shares.
But the articles I was looking at talked about stocks that not only paid dividends, but increased their dividends over time. Some of them increase their dividends every year. So think of it as better than compound interest: compound interest with an increasing interest rate. So the yield could stay at 2% if the stock price increased with the dividend payout. As the price goes up, the payout also goes up.
At some point I read about the S&P Dividend Aristocrats, and later the Dividend Achievers. The Aristocrats are stocks that have increased their dividends every year for at least 25 years.
Dividend Stocks
Stocks hit their low in March, 2009. Some of them were down 50% from their highs, even some of the Dividend Aristocrats. If you were relying on price and hoping to sell shares to get by, you had a hard time. But the Dividend Aristocrats kept on paying out more money. So I started looking at the financial statements for these companies on Yahoo Finance and for the most part I liked what I saw. (A couple of the companies I did not buy shares in later cut or did not raise their dividends.) I figured if a company was raising dividends while the world was ending, it was probably a safe bet.
I have moved from a capital gains/price model to a cash flow model. Granted, it takes a lot of cash to have a decent cash flow. I think relying solely on price is also a form of the Greater Fool Theory, a lighter version of someone who intends to flip. We had two crashes in a decade. Relying only on price is stupid. Someone described it as sawing off the tree branch you are sitting on. One issue with the price model is that you might not get the price you need when you need it. Plus by definition the only way you benefit from an asset with no cash flow is by selling. So you only benefit by owning something when you stop owning it.
And you can only sell once.
I looked around at a few brokers to see where to put my money. I had my Roth and a taxable account at T Rowe Price. Their brokerage fees were pretty high. ScottTrade did not allow the purchase of fractional shares. The big bank had its 401(k) plan with Fidelity. I called them up, and after finding out their fees and features I decided to stay with them. I moved my Roth over there. (I was unemployed and used the money from the taxable account for living expenses.)
I looked at the financial statements for the stocks on two of the Dividend Aristocrats list: the S&P 500 list, and the High Yield list. There is a lot of overlap.
I did not buy shares in every stock on the list. I can remember why I passed on a few of them. Old Republic was losing money then, and kept losing money for a few more years. Pitney Bowes still has a high yield. Everybody says that is a red flag, yet they are still paying it. Better safe than sorry. Leggett & Platt had a pretty high payout ratio. (I could see from their cash flow statement they were paying out as much as they were earning. I don’t think I had heard of the term “payout ratio” at that point.)
So I started out buying $1000 worth of shares in each stock. I don’t know why I did not just start out buying 50 shares of the ones I wanted. The absurdity of buying so few shares hit me when my 12 shares of 3M got me a whopping $6.30. It took three years to accrue an entire share of 3M.
Since then I have sold some of them. LLY stopped raising their dividend, CINF has slow yield growth, UVV went down in price and sells something fewer people are buying, and EV is a financial stock.
Eventually I also got rid of FDO, PNR, and CAT. FDO has a low yield. PNR also has a low yield, and it overlaps with a few other stocks. I had 20 shares of CAT. I got a letter from them offering to buy up my shares, or offering me enough to get me to 100. Either way they wanted to charge me $2/share. They can jump off a cliff. I sold on the open market.
Some might say buying a stock solely on the dividend is a bad idea. But is it any worse than blindly buying 500 because some firm decided to group them together? Besides, indexes are dragged down by stocks that do not pay dividends. If I wanted to get excited about price, I could become one of those gold nuts who keeps predicted the societal collapse that never happens. (I don’t think buying gold based on price is any different than buying a stock based on price.) Cash may be king, but cash flow is the king of kings.
Thoughts On Cramer
While I was starting to get into dividend investing, I also read a few books by Jim Cramer that I checked out from the library. I read Real Money, Stay Mad For Life, and Getting Back to Even. I did not start watching his show until I had gotten through those three books. I found out later you can download it for free from the Mad Money RSS feed.
I used to post the feed entry if there were any typos. I might get back to doing that.
He is known for making some bad calls (Bear Sterns, Lenny Dykstra). He did some questionable stuff at his hedge fund. His show certainly has a lot of energy. Some would say too much.
But having read his books before watching his show, I think Cramer is worth listening to. In his books he talks about dividend investing. He talks about how to look at companies and value stocks. He talks about how to read financial statements. He tells people that they should study companies they want to invest in.
And between the yelling and the throwing stuff, he says the same things on his show.
I know a guy who was a trader on the floor of the stock exchange in the late 1980s-early 1990s. He says a lot of the same things Cramer does. One favorite: Bulls make money, bears make money, pigs and sheep get slaughtered.
One criticism I have is that he tends to have a lot of the same CEOs on: AGN, HAIN, PVH, SAP. SAP is pretty big. The others, not so much. Although I do like hearing from the CEOs of NAT, ETN and HON. He doesn’t always ask them the hard questions, especially with oil and gas companies that engage in fracking. “Could you tell our audience how safe fracking is?” Seriously, what do you think the CEO of a driller will say to that? Once he asked the CEO of Pepsi about the safety of tap water, and she recommended that people just drink Aquafina, and he let it pass. Going with bottled water would be expensive. People don’t just drink water. People cook and clean with it as well.
And the talks with CRM are always a real love fest. You’re so great, Marc, really!!! XOXO
He is a bit wacky. He does make a lot of recommendations. But he tells you to make your own decisions and teaches you how to look at companies and what to look for. I think he does advocate a lot of good ideas: Looking at financial statements and listening to conference calls, diversification, and investing (and reinvesting) in dividend stocks.
I wish he would do a segment every now and then on dividend growth stocks and talk about some of the lists of dividend growth stocks that are out there. Perhaps he could have David Van Knapp on his show to talk about the Dividend Champions or Dividend Aristocrats.
Flowing With The Cash Flow
So I stuck with a lot of individual stocks for about seven years.
In 2018, I decided to go with ETFs. I got tired of entering information into my spreadsheet and GnuCash every few weeks. About a quarter of my stocks paid on the first day of “C” months. I thought PE ratios were a bit high, and I did not feel comfortable buying new stocks. Besides, even if I did, I would just get a tenth of a share every quarter. So to simplify my life, I went the ETF route.
Dividend Aristocrats is a probably a trademark of S&P. Dividend Achievers is probably a trademark of Indxis. This site has a disclaimer.